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COMMONWEALTH TERRACE COOPERATIVE, INC.

FINANCIAL REPORT

JUNE 30, 2016

C O N T E N T S

Page INDEPENDENT AUDITOR’S REPORT 1 FINANCIAL STATEMENTS

Balance sheets 3 Statements of revenue and expenses 4 Statements of changes in members’ equity 5 Statements of cash flows 6 Notes to the financial statements 7 SUPPLEMENTARY INFORMATION

Independent auditor’s report on supplementary information 14 Schedules of expenses 15 Schedules of cash and accrued expenses 17 Schedule of equipment and depreciation 18 Schedule of improvement reserves 19

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INDEPENDENT AUDITOR’S REPORT To the Board of Directors Commonwealth Terrace Cooperative, Inc. Falcon Heights, Minnesota Report on the Financial Statements We have audited the accompanying financial statements of Commonwealth Terrace Cooperative, Inc. which comprise the balance sheets as of June 30, 2016 and 2015, and the related statements of revenue and expenses, changes in members’ equity, and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Commonwealth Terrace Cooperative, Inc. as of June 30, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Omission of Required Supplementary Information about Future Major Repairs and Replacements

Management has omitted an estimate on the remaining lives and replacement costs of the common property and, therefore, has not presented supplementary information on future major repairs and replacements that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Financial Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by the missing information.

Boyum & Barenscheer PLLP Minneapolis, Minnesota January 27, 2017


BALANCE SHEETS

The Notes to Financial Statements are an integral part of these statements. -3-

JUNE 30, 2016 2015

CURRENT ASSETSCash 741,176$ 614,931$ Resident accounts receivable, net of allowance 18,398 -Due from University of Minnesota - 50,415 Due from vendor 15,211 12,764 Supplies inventory 8,900 8,900 Prepaid expenses 27,184 30,155

Total current assets 810,869 717,165

INVESTMENTS 993,921 1,029,126

EQUIPMENT, net 102,954 105,735

Total assets 1,907,744$ 1,852,026$

CURRENT LIABILITIESAccounts payable 80,605$ 105,572$ Accrued expenses 26,359 4,742 Patronage refund payable 77,047 80,171 Prepaid rents 45,862 -Member security deposits 424,190 404,670

Total current liabilities 654,063 595,155

IMPROVEMENT RESERVES 720,284 720,284

Total liabilities 1,374,347 1,315,439

MEMBERS' EQUITY 533,397 536,587

Total liabilities and members' equity 1,907,744$ 1,852,026$

ASSETS

LIABILITIES AND MEMBERS' EQUITY


STATEMENTS OF REVENUE AND EXPENSES


YEARS ENDED JUNE 30, 2016 2015

RENTAL INCOMEGross potential rent 4,729,680$ -$Less: vacancy loss (71,700) -

Total rental income 4,657,980 -

OTHER INCOMEManagement fee - 2,203,950 Surcharges 62,392 57,903Vending concessions 32,151 32,400 Late fees and penalties 8,659 8,007 Service fees 34,693 33,715 Investment income and realized losses 1,374 49,279 Unrealized gain (loss) on investments (36,255) (54,843) Leases and rents 23,857 22,499 Repair charges 16,720 16,433 Miscellaneous 16,277 8,805 Transfer from reserve - 30,000

Total other income 159,868 2,408,148

Total income 4,817,848 2,408,148

EXPENSESGeneral and administrative 532,214 511,180 Maintenance 1,111,740 910,207 Utilities 495,189 525,682 Other expenses 407,967 379,664 University of Minnesota fee 2,193,691 -Patronage refund 77,047 80,171 Income taxes 3,190 2,491

Total expenses 4,821,038 2,409,395

Excess (deficit) of revenue over expenses (3,190)$ (1,247)$


STATEMENTS OF CHANGES IN MEMBERS’ EQUITY


YEARS ENDED JUNE 30, 2016 AND 2015

BALANCE, June 30, 2014 537,834$

Deficit of revenue over expenses (1,247)

BALANCE, June 30, 2015 536,587

Deficit of revenue over expenses (3,190)

BALANCE, June 30, 2016 533,397$


STATEMENTS OF CASH FLOWS



CASH FLOWS FROM OPERATING ACTIVITIESExcess (deficit) of revenue over expenses (3,190)$ (1,247)$ Adjustments to reconcile excess of revenue over expenses

net cash provided Depreciation 30,227 31,735 Unrealized loss on investments 36,255 54,843 Loss (gain) on sale of investments 49,552 (8,501) Bad debts 10,929 -

Net change in operating assets and liabilities:Resident accounts receivable (18,398) -Due from University of Minnesota 39,486 (28,996) Other receivables (2,447) 2,334 Prepaid expenses 2,971 4,223 Accounts payable (24,967) (9,924) Accrued expenses 21,617 (1,402) Patronage refund payable (3,124) (13,470) Prepaid rents 45,862 -Member security deposits 19,520 5,107

Net cash provided by operating activities 204,293 34,702

CASH FLOWS FROM INVESTING ACTIVITIESPurchases of equipment (27,446) (7,873) Purchases of investments (501,169) (391,294) Sales of investments 450,567 350,624

Net cash used by investing activities (78,048) (48,543)

CASH FLOWS FROM FINANCING ACTIVITIESIncrease in improvement reserves - 50,349

Net cash provided by financing activities - 50,349

Increase in cash 126,245 36,508

Cash, beginning of year 614,931 578,423

Cash, end of year 741,176$ 614,931$

SUPPLEMENTAL INFORMATION:Cash paid for interest 3,768$ 3,403$ Cash paid for income taxes - 20,363


NOTES TO THE FINANCIAL STATEMENTS

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NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of business:

Commonwealth Terrace Cooperative, Inc. (the Cooperative) is a Minnesota corporation providing 464 units of family rental housing to students who attend the University of Minnesota at its St. Paul campus. Residents may become members of the Cooperative.

Financial statement presentation:

This summary of significant accounting policies of the Cooperative is presented to assist in understanding the financial statements. The financial statements and notes are representations of the Cooperative’s management, which is responsible for their integrity and objectivity. These accounting policies conform to United States generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.

Use of estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Basis of accounting:

The Cooperative uses the accrual basis of accounting for financial statement reporting. Revenue is recognized when earned and expenses are recognized when incurred.

Revenue recognition:

Revenues are recognized in the period in which the rentals or management fees are earned. Rental and management fee payments received in advance are deferred until earned. All leases between the Cooperative and the residents of the property are operating leases.

Concentration of credit risk:

The Cooperative maintains cash balances in financial institutions that are insured by the Federal Deposit Insurance Corporation (FDIC), which at times may exceed federally insured limits. At June 30, 2016, the Cooperative’s cash in a single financial institution exceeded the FDIC insured limit of $250,000 by approximately $258,000. The Cooperative has not experienced any losses in such accounts and believes they are not exposed to any significant credit risk on cash and equivalents.

Cash:

For purposes of the statement of cash flows, the Cooperative considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.



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NOTE 1. (CONTINUED)

Resident accounts receivable:

Resident accounts receivable represent past due rent and special charges for cooperative unit rents. Based on management’s evaluation of uncollected accounts at the end of each year, potential bad debts are provided for on the allowance method. Balances that are still outstanding after management has used reasonable collection efforts are written off. An allowance of $464 and $8,000 has been established for 2016 and 2015, respectively.

Investments:

The Cooperative makes investments in money market funds, certificates of deposit, preferred stock and government securities funds. The investments are presented in the financial statements at fair value. Unrealized appreciation or depreciation in the fair value of investments held at year-end is recognized in the statement of revenues and expenses. At June 30, 2016 cost exceeded the market value of the investments by $23,494, and at June 30, 2015 the market value of investments exceeded cost by $18,744.

Fair Value Measurements:

Accounting Standard Codification (ASC) 820 (“Fair Value Measurements”) establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to adjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described as follows:

Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Partnership has the ability to access.

Level 2 – Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the assets or liability; inputs that are derived principally from or corroborated by observable market data by

correlation or other means.

If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.



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NOTE 1. (CONTINUED) The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at June 30, 2016 and 2015. Money market funds: Investments in money market accounts are valued at cost, which approximates fair value. Stocks, options and ETFs: Valued at the closing price reported on the active market on which the individual securities are traded. Unit investment trust: Valued at the daily closing price as reported by the fund. These funds are required to publish their daily net asset value (NAV) and to transact at that price. Mutual funds: Valued at the daily closing price as reported by the fund. Mutual Funds held by the Cooperative are open ended mutual funds that are registered with the SEC. These funds are required to publish their daily net asset value (NAV) and to transact at that price. The Mutual Funds held by the Cooperative are deemed to be actively traded. The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although management believes the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Equipment:

Equipment is stated at cost. The expenditures determined to represent additions and betterments are capitalized, while maintenance and repairs are charged to expense when incurred. Depreciation for financial reporting is computed utilizing straight-line methods over the estimated useful lives of the assets as follows:

Office, maintenance and community center equipment 3 - 7 yearsCapital improvements 5 - 10 years



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NOTE 1. (CONTINUED)

Income taxes:

The Cooperative is a non-exempt cooperative and pays federal and state income taxes on income not distributed to members and patrons. The Cooperative is a non-exempt Cooperative and pays federal and state income taxes on its net income. At June 30, 2015, the Cooperative has a net operating loss carryover to offset future taxable income of approximately $45,000. The loss carryovers expire in varying amounts beginning in 2026. For the years ended June 30, 2016 and 2015, the Cooperative had state taxes due of $2,610 and $1,921, respectively, and a minimum fee payable to the state of Minnesota of $580 and $570, respectively.

Gain or loss on marketable securities is recorded, for income tax purposes, when the security is sold. Deferred income taxes have not been provided for since financial statement income, after patronage refunds and taxable income, are basically the same.

Management has evaluated its tax positions and has concluded that they do not result in anything that would require either recording or disclosure in the financial statements.

Security deposits:

Members are required to pay a security deposit upon execution of their lease. These deposits are placed in a restricted savings account and refunded, with interest, upon termination of the lease agreement. Any amounts not returned to the tenants due to lease violations are transferred to the general operating account.

Advertising:

Advertising is expensed as incurred. Advertising expense was $999 and $622 for the years ended June 30, 2016 and 2015, respectively.

Management agreements:

The University of Minnesota owns the housing properties which are operated by the Cooperative under a management agreement. The Cooperative receives a fee for managing the facilities which covers obtaining tenants, hiring employees to maintain the properties, contracting for services, collection of rents and other responsibilities. The Cooperative has no obligation for major renovation and replacement of the housing properties.

Retirement plans:

The Cooperative has a SEP savings plan in which the Cooperative contributes 6 percent of full-time employee’s salaries to the fund. The Cooperative contributed $28,980 and $24,841 to this plan for the year ended June 30, 2016 and 2015, respectively.



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NOTE 1. (CONTINUED)

New accounting pronouncements:

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 supersedes the revenue recognition requirement in Topic 605, Revenue Recognition, and most industry-specific guidance. Under the requirements of ASU No. 2014-09, the core principle is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March through May 2016, amendments to ASU 2014-09 were issued, further clarifying the treatment of revenue recognition from contracts with customers. The Cooperative will be required to retrospectively adopt the guidance in ASU No. 2014-09, and the applicable amendments, for the years beginning after December 15, 2018. The Cooperative has not yet determined the impact of the adoption of ASU No. 2014-09 on its financial statements.

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets, initially measured at the present value of the lease payments. The accounting guidance for lessors is largely unchanged. For private companies, the ASU is effective for annual and interim periods beginning after December 15, 2019 with early adoption permitted. It is to be adopted using a modified retrospective approach. The Cooperative is currently evaluating the impact that the adoption of this guidance will have on the Cooperative’s financial statements and anticipates the new guidance will impact its financial statements given the Cooperative has lease obligations, see Note 2.

Subsequent events:

In preparing these financial statements, the Cooperative has evaluated subsequent events and transactions for potential recognition or disclosure through January 27, 2017 the date the financial statements were available to be issued.



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NOTE 2. FAIR VALUE MEASUREMENTS The following tables set forth by level, within the fair value hierarchy, the Cooperative’s assets at fair value as of June 30, 2016 and 2015: Investments at Fair Value as of June 30, 2016 Level 1 Level 2 Level 3 Total

Money market funds 177,295$ -$ -$ 177,295$ Stocks, options and ETFs 107,715 - - 107,715 Unit investment trust 240,142 - - 240,142 Mutual funds 468,769 - - 468,769

Total investments at fair value 993,921$ -$ -$ 993,921$

Investments at Fair Value as of June 30, 2015 Level 1 Level 2 Level 3 Total

Money market funds 98,347$ -$ -$ 98,347$ Stocks, options and ETFs 39,114 - - 39,114 Unit investment trust 325,741 - - 325,741 Mutual funds 565,924 - - 565,924

Total investments at fair value 1,029,126$ -$ -$ 1,029,126$

NOTE 3. UNIVERSITY RESERVES As owners of the land and buildings, the University of Minnesota maintains reserves for major renovation and replacement of the housing properties. The money for these reserves is obtained through rents charged to tenants of the buildings. The reserves are currently funded in accordance with the University’s long-term planning.



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NOTE 4. IMPROVEMENT RESERVES

Reserves for major expenditures have been established through funds received from the University of Minnesota. The reserves are as follows:

JUNE 30, 2016 2015

Utilities reserve 152,584$ 152,584$ Rent loss reserve 185,655 185,655 Maintenance reserve 84,903 84,903 Exterior painting reserve 134,861 134,861 Snow removal reserve 99,557 99,557 Vehicle reserve 35,524 35,524 Capital improvements reserve 9,968 9,968 Administrative savings reserve 17,232 17,232

Total reserves 720,284$ 720,284$

NOTE 5. EQUIPMENT

Equipment consists of the following:

JUNE 30, 2016 2015

Office equipment 91,839$ 91,839$ Maintenance equipment 151,761 151,761 Community center equipment 44,522 44,522 Capital improvements 169,021 141,575

457,143 429,697

Less: accumulated depreciation (354,189) (323,962)

Equipment, net 102,954$ 105,735$

Depreciation expense related to fixed assets amounted to $30,227 and $31,735 for the years ended June 30, 2016 and 2015, respectively.

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INDEPENDENT AUDITOR’S REPORT ON SUPPLEMENTARY INFORMATION

To The Board of Directors Commonwealth Terrace Cooperative, Inc. Falcon Heights, Minnesota

We have audited the financial statements of Commonwealth Terrace Cooperative, Inc. as of and for the years ended June 30, 2016 and 2015, and our report thereon dated January 27, 2017, which expressed an unmodified opinion on those financial statements appears on page 1. Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The supplementary information on pages 14 to 18 is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audits of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole.

Boyum & Barenscheer PLLP Minneapolis, Minnesota January 27, 2017


SCHEDULES OF EXPENSES

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GENERAL AND ADMINISTRATIVE Salaries 351,732$ 327,809$ Temporary help 8,000 9,439 Payroll taxes 28,369 26,153 Pension benefits 16,152 12,500 Medical benefits 57,597 61,400 Staff support 2,027 1,775 Office supplies 9,807 8,394 Postage 999 1,321 Telephone 15,345 16,448 Professional and consulting services 31,640 35,522 Printing and copying 7,110 8,249 Advertising 999 622 Marketing 2,437 1,548

Total general and administrative 532,214$ 511,180$

MAINTENANCESalaries 256,686$ 238,164$ Payroll taxes 18,733 17,720 Pension benefits 12,828 12,341 Medical benefits 53,416 57,474 Pest control 8,233 8,652 Contract services 216,999 85,738 Contract cleaning 84,564 70,509 Uniforms cleaning 2,423 2,222 Maintenance supplies 107,582 87,756 Recycling and rubbish removal 49,842 51,484 Snow removal 49,413 58,584 Painting contract 106,016 90,547 General maintenance 28,016 20,085 Vehicle expense 3,986 5,060 Grounds maintenance 113,003 103,873

Total maintenance 1,111,740$ 910,209$


SCHEDULES OF EXPENSES

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(Continued)

UTILITIESWater and sewer 169,786$ 158,614$ Gas 136,392 201,958 Electricity 189,011 165,110

Total utilities 495,189$ 525,682$

OTHER EXPENSESInsurance 175,366$ 172,952$ Ward Funds 2,757 5,416 Interest on security deposits 3,768 3,403 Community education and involvement 10,002 13,892 Printing 1,114 923 Community Center 2,297 2,527 Employee development 3,200 3,500 Board support 3,346 3,373 Miscellaneous 42,259 14,645 Depreciation 30,227 31,735 Cable television 133,631 127,298

Total other expenses 407,967$ 379,664$


SCHEDULES OF CASH AND ACCRUED EXPENSES

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JUNE 30, 2016 2015

CASHSunrise checking 385,180$ 259,092$ Sunrise savings 105,853 105,814 Western checking 19,788 19,956 Western savings 230,355 230,069

Total cash 741,176$ 614,931$

OTHER RECIEVABLESDue from vendor 15,211$ 12,764$

Total other receivables 15,211$ 12,764$

ACCRUED EXPENSESAccrued fees 27,351$ 6,000$ Income taxes - -Health flex payable (992) (1,258)

Total accrued expenses 26,359$ 4,742$


SCHEDULE OF EQUIPMENT AND DEPRECIATION

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BALANCE BALANCE06/30/15 Additions Disposals 06/30/16

Office equipment 91,839$ -$ -$ 91,839$

Maintenance equipment 151,761 - - 151,761

Community center equipment 44,522 - - 44,522

Capital improvements 141,575 27,446 - 169,021

429,697$ 27,446$ -$ 457,143$

BALANCE BALANCE06/30/15 Additions Disposals 06/30/16

Office equipment 84,146$ 3,315$ -$ 87,461$

Maintenance equipment 88,653 19,005 - 107,658

Community center equipment 40,254 1,990 - 42,244

Capital improvements 110,909 5,917 - 116,826

323,962$ 30,227$ -$ 354,189$

Net book value:Office equipment 4,378$ Maintenance equipment 44,103 Community center equipment 2,278 Capital improvements 52,195

102,954$

ASSETS

ACCUMULATED DEPRECIATION


SCHEDULE OF IMPROVEMENT RESERVES

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BALANCE BALANCE06/30/15 Additions Disbursements Transfers 06/30/16

Utility 152,584$ -$ -$ -$ 152,584$ Rent loss 185,655 - - - 185,655

Maintenance 84,903 - - - 84,903

Exterior painting 134,861 - - - 134,861

Snow removal 99,557 - - - 99,557

Vehicle 35,524 - - - 35,524

Capital improvements 9,968 - - - 9,968

Administrative savings 17,232 - - - 17,232

720,284$ -$ -$ -$ 720,284$

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